COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Annual Sustainable Growth Strategy 2020
Date: 2019-12-17
Institutions: European Commission, Secretariat-General
Subjects: EU Member State, EU growth strategy, Economic and Monetary Union, adaptation to climate change, competitiveness, economic reform, environmental policy, social development, sustainable development, technological change

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 17.12.2019  COM(2019) 650 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Annual Sustainable Growth Strategy 2020 {SWD(2019) 444 final}  
 
 
‘I want Europe to strive for more when it comes to social fairness 
 and prosperity. This is the Union’s founding promise.’ 
Ursula von der Leyen, 16 July 2019 

INTRODUCTION 

Economic growth is not an end in itself. An economy must work for the people and the 
planet. Climate and environmental concerns, technological progress and demographic change 
are  set  to  transform  our  societies  profoundly.  The  European  Union  and  its  Member  States 
must  now  respond  to  these  structural  shifts  with  a  new  growth  model  that  will  respect  the 
limitations  on  our  natural  resources  and  ensure  job  creation  and  lasting  prosperity  for  the 
future.  

The  European  economy  has  successfully  left  the  years  of  financial  crisis  management 
behind. While it is now in its seventh year of consecutive growth, external and geopolitical 
prospects are dimming, uncertainty is running high and Europe looks to be heading towards a 
period of subdued growth and low inflation.  

To  stay  competitive  in  tomorrow’s  world  and  to  achieve  Europe’s  goal  of  climate 
neutrality, we must now turn to addressing the economy’s longer-term challenges.  The 
coming  into  office  of  a  new  Commission  with  an  ambitious  European  Green  Deal,  with 
priorities on a Europe that works for the people and a Europe fit for the digital age is a good 
moment for a new start towards this sustainable, new growth model.  

This  economic  agenda  must  transform  the  Union  into  a  sustainable  economy,  helping 
the EU and its Member States to achieve  the United Nations Sustainable Development 
Goals, which they committed to. It must drive and accompany the twin digital and climate 
transition, transforming our Social Market Economy to ensure that Europe remains the home 
of  the  world’s  most  advanced  welfare  systems  and  is  a  vibrant  hub  of  innovation  and 
competitive entrepreneurship.  

The European Green Deal is our new growth strategy. It puts sustainability – in all of its 
senses – and the well-being of citizens at the centre of our action. This requires bringing 
together four dimensions: environment, productivity, stability and fairness.  

At the heart of our growth strategy are four complementary dimensions. 

First, our efforts should focus on leading the transition to a nature-friendly and climate neutral 
continent by 2050, while ensuring that everyone can take advantage of the opportunities that 
this will bring along 

Second,  by  developing  new  technologies  and  sustainable  solutions,  Europe  can  be  at  the 
forefront of future economic growth and become a global leader in an increasingly digitalised 
world, including in key areas for its technological sovereignty such as cybersecurity, artificial 
intelligence and 5G. Digital technologies are a key enabler of the European Green Deal. 

Third,  the  Union  needs  to  complete  its  Economic  and  Monetary  Union  to  ensure  that  all 
economic tools are ready and available should there be a significant adverse economic shock. 
The international role of the euro must be strengthened to enhance Europe’s clout in the world 

1 

 
 
 
 
and on global markets and to help protect European firms, consumers and governments from 
unfavourable external developments. A vibrant and resilient Economic and Monetary Union, 
resting  on  the  solid  foundations  provided  by  the  Banking  Union  and  the  Capital  Markets 
Union, is the best means to increase financial stability in Europe and thereby, the international 
role of the euro. 

Fourth, the new economic agenda must ensure that the transition is fair and inclusive and puts 
people first.  It  must pay particular  attention to  the regions,  industries and workers  who will 
have to make the largest transitions.   

At  the  core  of  this  will  be  an  industrial  strategy  with  strong  foundations  in  the  Single 
Market  that  enables  our  businesses  to  innovate  and  to  develop  new  technologies  while 
boosting  circularity  and  creating  new  markets.  That  means  refocusing  Europe’s 
economic  policy  towards  the  long  term,  with  the  objective  of  offering  younger 
generations in all parts of Europe a sustainable and prosperous future. We need to move 
from  an  incremental  to  a  systemic  approach  across  all  policies,  taking  a  “whole-of-
government’ approach. It will need to be an inclusive process, developed with the European 
Parliament,  the  Member  States,  social  partners  and  the  stakeholders.  The  Sustainable 
Development  Goals  will  be  at  the  heart  of  EU’s  policymaking  and  action.  To  this  end,  the 
European Semester provides a well-established framework for the coordination of economic 
and  employment  policies  needed  to  guide  the  Union  and  its  Member  States  through  these 
transformations, which have economy-wide implications. In this Annual Sustainable Growth 
Strategy, the Commission outlines the economic and employment policy priorities for the EU. 
Within this approach, synergies can be created, trade-offs between the four dimensions of the 
growth agenda can be addressed and solutions presented.  

1.  Europe’s economic outlook 

The European economy is now in its seventh consecutive year of growth. The economy is 
expected  to  continue  expanding  in  2020  and  2021,  even  though  growth  prospects  have 
weakened.  Labour  markets  remain  strong  and  unemployment  continues  to  fall,  though  at  a 
slower pace (1). Public finances continue to improve, our banking system is more robust and 
the foundations of our Economic and Monetary Union are stronger. Investment and potential 
growth,  however,  still  remain  below  pre-crisis  levels.  Government  budgetary  balances  are 
expected  to  deteriorate  slightly  between  2019  and  2021,  due  to  the  impact  of  lower  growth 
and  somewhat  looser  discretionary  fiscal  policies  in  some  Member  States,  including 
expansionary fiscal policies in some. 

The near-term economic outlook is overshadowed by a much less supportive  economic 
and  geopolitical  environment  and  high  uncertainty.  Global  growth  prospects  are  fragile. 
Trade tensions in the manufacturing sector and geopolitical uncertainty are having a negative 

1  The Proposal for a Joint Employment Report from the Commission and the Council, adopted together with the Annual 

Sustainable Growth Strategy (COM(2019) 653), presents a detailed account of labour market and social policy 
developments, including through the Social Scoreboard 

2 

 
 
 
 
                                                           
impact on investment decisions. A decrease in trade intensity, coupled with low productivity 
growth could have a long-lasting impact on Europe’s position in a world that is increasingly 
defined  by  the  rivalries  between  the  United  States  and  China.  This  in  particular  affects  the 
manufacturing sector, which is  also  experiencing structural  shifts. As a result, the European 
economy  looks  to  be  heading  towards  a  period  of  more  subdued  growth  and  low  inflation. 
Euro area gross domestic product (GDP) is now forecast to expand by 1.1% in 2019 and by 
1.2% in 2020 and 2021. For the EU as a whole, GDP is expected to rise by 1.4% per annum 
between 2019 and 2021.  

The medium-term economic prospects are hampered by an ageing population, sluggish 
productivity  growth  and  the  rising  impact  of  environmental  degradation.  By  2024,  an 
ageing  populations  means  the  work  force  in  11  Member  States  is  estimated  to  fall  by  more 
than  3%  compared  to  today2.  By  2060,  the  EU’s  workforce  will  decline  by  12%.    This, 
combined  with  a  decades-long  trend  of  declining  productivity  growth  puts  a  strain  on  the 
growth  potential  of  the  economy  and  put  on  public  finances  in  the  future.  In  addition,  the 
impact  of  environmental  degradation  is  expected  to  increasingly  affect  economic  activity, 
through  more  frequent  extreme  weather  conditions,  influences  on  human  health  and  less 
reliable access to material resources and ecosystem services.  

With clouds forming on the horizon, Europe must develop a new growth paradigm that 
effectively  addresses  the  long-term  challenges  transforming  its  society.  This  new 
paradigm will also be key in establishing Europe’s political and economic leadership at global 
level. It will also boost potential growth, helping Europe to remain strong in the face of rising 
uncertainty in the short-term. 

2.  A new paradigm to address interrelated key challenges  

Competitive  sustainability  has  always  been  at  the  heart  of  Europe’s  social  market 
economy  and  should  remain  its  guiding  principle  for  the  future.  Moving  towards  a 
sustainable  economic  model,  enabled  by  digital  and  clean  technologies,  can  make  Europe  a 
transformational  frontrunner.  Leadership  on  environmental  protection  and  a  strong, 
innovative  industrial  base  must  be  seen  as  two  sides  of  the  same  coin,  giving  the  EU  a 
competitive first-mover advantage. A stable economy, allowing for policies focused towards 
the  long-term,  and  a  just  transition  for  those  most  affected  by  the  transformations  are 
prerequisite for success and should complete our framework. 

Environmental sustainability, productivity gains, fairness and macro-economic stability 
will  be  the  four  dimensions  of  our  economic  policy  in  the  years  to  come.  These 
dimensions,  which  are  closely  interrelated  and  mutually  reinforcing,  should  guide  structural 
reforms, investments and responsible fiscal policies across all Member States.  

These four key dimensions will be crucial in implementing the Sustainable Development 
Goals  (SDGs).  Integrating  the  objectives  of  the  SDGs  in  the  European  Semester,  with  a 
specific focus on the economic and employment aspects, provides a unique opportunity to put 

2  The 2018 Ageing Report  https://ec.europa.eu/info/sites/info/files/economy-finance/ip079_en.pdf 

3 

 
 
 
 
                                                           
people,  their  health  and  the  planet  at  the  centre  stage  of  economic  policy.  In  today’s 
geopolitical context, putting the SDGs at the centre of the Union’s policymaking and action 
also sends a strong message about Europe’s commitment towards sustainability. 

To succeed, costs and benefits need to be balanced in the short and long term. Benefits 
should  be  shared  and  costs  must  not  be  borne  by  the  most  vulnerable.  Both  climate  change 
itself and the flanking policies required to overcome the challenges it creates have significant 
distributional  consequences,  especially  in  the  short  term.  When  designing  policies  and 
formulating  recommendations  for  structural  reforms,  we  need  to  ensure  that  support  for  the 
people most affected by these societal changes is put in place. On the other hand, the green 
transition  will  also  create  new  jobs  and  greater  well-being,  for  example  in  the  form  of 
healthier  working  and  living  environments.  Also  in  other  policy  areas,  short  term  trade-offs 
exist.  For  example,  when  it  comes  to  seeking  a  more  inclusive  growth,  the  labour  market 
integration of more lower-skilled workers may reduce average productivity in the short-term. 
This,  however,  does  not  change  the  long-term  advantage  of  labour  market  integration 
contributing  to  a  more  balanced  and  prosperous  society  over  time.  To  maximise  synergies 
between the various policy goals outlined, significant public and private investments will be 
needed, for example in education, retraining and innovation.  

4 

 
 
 
 
 
 
 
3.  Environmental sustainability 

Tackling climate and environmental challenges is this generation’s defining task.  It will 
remain  so  for  the  years  to  come.  The  transition  to  climate  neutrality  requires  a  profound 
transformation of the economy within one generation. These changes do not only concern the 
energy, building and transport sectors, but also industry, agriculture and services sectors. At 
the same time, these changes offer a unique opportunity to modernise the ageing capital stock 
of the EU economy and to relaunch competitiveness in a sustainable way with people at the 
centre of the transition 

With a stronger focus on climate and environmental policies, the European Semester is 
reinforced  as  an  encompassing  tool  for  economic  and  employment  policy.  The  growth 
opportunities  arising  from  a  stronger  focus  on  environmental  sustainability  are  central  to 
Europe’s economic agenda. The Semester can provide specific guidance to Member States on 
where  structural  reforms  and  investment  towards  a  more  sustainable  and  competitive 
economic model are most needed. It can also help Member States to identify and address key 
trade-offs, for instance by tackling the social impacts of rising energy prices through adequate 
social and fiscal policies. Europe needs to act decisively in areas like the circular economy, 
renewable energy, energy-efficient buildings and low-emission transport. The EU’s industry 
is already one of the most energy-efficient in the world. Europe needs to capitalise on this and 
provide  additional  incentives  for  businesses  and  investors  to  enable  Member  States  attain 
ambitious  climate  objectives.  Support  for  the  people,  sectors  and  regions,  which  are  most 
affected  by  the  transformation,  needs  to  be  factored  into  the  reforms.  Further  deepening 
cohesion policy’s emphasis on green and digital investment will contribute to the strategy 

Europe needs to invest record amounts in cutting-edge research and innovation, using the full 
flexibility of the next EU budget to focus on the areas with the greatest potential. Investments 
should  be  directed  towards  clean  assets  that  are  the  most  productive  in  mitigating  climate 
change  and  to  disruptive  innovation  efforts  both  at  EU  and  national  level.  Achieving  the 
existing  2030  climate  and  energy  targets  will  require  EUR  260  billion  of  additional 
investment in the energy system annually in 2021-2030. The biggest investment push will be 
required  to  improve  energy  efficiency  in  the  residential  and  tertiary  sectors.  In  addition, 
significant investments are needed in power generation and grid infrastructure. The swift roll 
out  of  alternative  fuels  infrastructure  within  the  next  two  years  will  be  critical  for  the 
automotive industry to achieve the emissions targets for new cars.  

In  this  context,  changes  to  tax/subsidy  systems  are  needed,  to  ensure  the  incentives  are 
climate and environmentally-friendly, and to raise the necessary funding to invest. Yet, public 
funding alone will not be enough. We need to tap into private investment by putting green and 
sustainable financing at the heart of Europe’s investment chain and financial system.  

Through  the  Sustainable  Europe  Investment  Plan,  the  European  Union  can  play  a 
catalysing role for private and public green investments. This plan will combine dedicated 
financing  to  support  sustainable  investments  with  proposals  for  an  improved  regulatory 
framework,  mobilising  sustainable  investment  in  every  corner  of  the  EU.  This  will  be 
achieved by devoting a greater share of EU expenses to climate than ever before, by crowding 
in  private  funding  through  guarantees,  by  creating  an  enabling  framework,  and  by  helping 
project promoters structure bankable green projects. The InvestEU Programme will contribute 
significantly  here.  In  addition,  the  European  Investment  Bank  (EIB)  Group  will  become 

5 

 
 
 
Europe’s  climate  bank  by  doubling  its  climate  target  to  50%.  Under  the  upcoming  Just 
Transition  Mechanism,  the  Commission  is  also  working  with  the  EIB  Group  towards 
mobilising significant investments for regions that will need to be particularly assisted in the 
environmental and climate transition during the period of the next MFF.  

Increasing revenues from the EU emissions trading system (ETS) provides an additional 
source  for  financing  climate  action  and  the  modernisation  of  the  economy.  In  2018, 
revenues from ETS auctions amounted to some EUR 14 billion. In 2019, the revenues from 
EU ETS auctions are expected to be even higher and over the coming years, annual revenues 
will  remain  considerable.  This  money  should  be  used  to  support  the  achievement  of  2030 
climate and energy targets and invest in the transition to climate-neutrality. 

4.  Productivity growth  

In the context of population ageing and increasingly binding resource constraints, future 
income and employment growth in Europe will depend crucially on higher productivity 
and innovation. Productivity growth in the EU remains significantly below the level of other 
global players. Member States stopped converging with the United States in the 1980s. This 
also reflects the global situation of European firms. Among the top 100 largest publicly listed 
companies, today only 23 are European. Ten years ago, 40 were European. At the same time, 
disparities within the EU have increased, with the top 10% of the regions more than six times 
more  productive  than  the  bottom  10%.  The  establishment  of  National  Productivity  Boards 
could  benefit  national  debates  on  how  to  boost  productivity  by  providing  high-quality  and 
independent analysis and enhancing national ownership of structural reforms. 

Achieving higher productivity requires a systematic and forward-looking research and 
innovation strategy. The productivity gap between the best performing and laggard firms has 
increased  in  most  Member  States.  Structural  reforms  aimed  at  fostering  the  spread  of 
innovation and improving access to finance could enable a much wider set of firms to benefit 
from  innovations,  thus  boosting  productivity  growth.  Public  and  private  investment  in 
innovative  technologies,  including  advanced  digital  technologies,  should  be  supported  to 
foster  the  creation  of  new  goods,  services  and  business  models.  More  young  and  nimble 
innovators with breakthrough technologies are needed, like this generation’s tech giants were 
only a decade ago. 

Digital  technologies,  like  Artificial  Intelligence  or  the  Internet  of  Things  and  access  to 
data  are  crucial  to  a  more  productive  and  green  economy.  They  are  changing  how  we 
communicate,  live  and  work.  The  changing  dynamics  brought  about  by  the  digital 
transformation  require  additional  ambition  at  EU  and  national  levels  in  terms  of  increased 
investment, innovation-conducive regulation, effective reforms and a human-centric approach 
based  on  European  values.  Europe  needs  a  strong  in  industrial  base,  built  on  a  common 
strategy  and  pooled  resources  in  key  sectors,  to  be  able  to  produce  domestically  the 
technologies  it  needs  to  stay  at  the  forefront  of  global  competition.  Europe  also  needs  to 
remain  technologically  sovereign  by  investing  in  innovative  technologies  like  block-chain, 
high-performance  and  quantum  computing,  algorithms  and  tools  to  allow  data  sharing  and 
data usage. Data and Artificial Intelligence are major drivers for innovation that can help us to 

6 

 
 
 
 
find  solutions  to  societal  challenges,  from  health  to  farming  and  food  production,  from 
security to manufacturing.  

In  times  of  increasing  global  tensions,  the  EU  Single  Market  offers  Member  States 
multiple opportunities to expand trade, create jobs and boost growth. The Single Market 
is a major source of resilience for the EU economy. Europe’s competitors are continent-sized 
economies,  so  the  EU  needs  a  true,  continent-sized  single  market.  The  benefits  are  clear: 
technological  advances  spread  faster  in  a  unified  market.  Well-functioning  product  and 
services  markets  are  a  key  driver  of  productivity  growth,  as  they  enable  a  more  efficient 
allocation of resources. However, progress in market integration is uneven and we need a new 
impetus is needed not least for the digital single market, European networks and the Capital 
Markets Union.  

At  the  core  of  the  Single  Market,  standardisation  plays  a  key  role  to  further  the  EU 
sustainable  development  agenda.  Standards  are  essential  to  steer  business  towards 
Sustainable Development Goals as they act as bridges linking legal provisions with down-to-
earth technical practice. Standards also contribute to competitiveness by reducing production 
costs  and  increasing  market  size.  For  these  reasons,  standardisation  can  help  developing 
innovative  products  and  production  processes  that  based  on  recent  technological  progress 
contribute to energy efficiency, enhanced recycling, and sustainable production. The clearest 
examples  of  the  role  of  standards  in  promoting  the  sustainable  development  agenda  are 
“Ecodesign” and the Energy Labelling policy framework3. Finally, standards also contribute 
to a fair global competition. 

Box 1: Contribution of the Single Market and Single Market Performance Report4 
The Single Market is a major asset of the Union. The unprecedented integration of the past 
25  years  has  resulted  in  closer  economic  and  social  connections  between  individuals  and 
businesses across Member States. The Single Market holds potential to deliver more benefits 
to individuals and businesses.  

The  Single  Market  needs  to  be  completed  and  implemented  in  those  areas  where  the 
results  of  past  efforts  still  fall  short  of  the  expectations,  and  it  needs  to  be  continuously 
updated to face new challenges. This is also true for recently adopted legal acts affecting the 
digital side of the economy. The  financial  crisis  has emphasised the importance of stability 
and  integration  in  capital  and  financial  markets,  where  fragmentation  remains  a  handicap 
for  firm  growth  and  investment.  Energy  has  become  a  key  element  of  integration  for  the 
Union,  but  energy  markets  still  remain  largely  fragmented  at  national  level.  Environmental, 
climate  and  infrastructure  objectives  are  also  critical  to  ensure  that  the  Single  Market 
performs in line with social expectations. The Single Market is being deeply transformed to 
enable  EU  firms  and  individuals  to  get  the  most  out  of  the  possibilities  offered  by  new 
technologies, such as digitalisation.  

3  Since 2009, Ecodesign has been delivering substantial energy savings and associated avoided CO2 emissions, as well as, 

increasingly, material efficiency savings.  

4  Single Market Performance Report SWD(2019) 443 

7 

 
 
 
 
                                                           
The Single Market is key to the European Semester and vice versa. Many of the structural 
barriers  preventing  full  delivery  of  the  benefits  of  the  Single  Market  are  actually  due  to 
regulations  or  administrative  practices  at  national,  regional  or  local  levels,  worsening  the 
business  environment  and  discouraging  firms  from  operating  cross-border.  The  lack  of 
administrative  capacity  or  professionally  qualified  staff  damages  the  performance  of  public 
procurement markets in some Member States. 

These findings are reflected in the Single Market Performance Report, which is a novelty 
in  the  2020  European  Semester  cycle,  and  which  is  published  alongside  this  Annual 
Sustainable Growth Strategy.  

The objective of the report is to assess the market performance of the real economy in the 
Single  Market.  Whilst  in  the  past,  monitoring  efforts  focused  mainly  on  the  legal 
environment of the Single Market to ensure that it was properly enforced, the report focuses 
primarily on the results and achievements of the Single Market.  

The report firstly takes into account the obstacles hindering the delivery of Single Market 
benefits to citizens and businesses. Secondly, it assesses the Single Market achievements: 
more  choice  for  consumers  and  businesses,  lower  prices,  and  high  standards  of  consumer 
safety and environmental protection. Lastly, it scrutinizes a broad range of activities relevant 
for  the  good  performance  of  the  Single  Market  including  its  environmental  performance 
and digitalisation. Against  this  background, the Single Market  Performance Report intends 
to  highlight  the  importance  of  structural  reforms  at  a  Member  State  level  for  a  good 
performance of the Single Market.  

Closer  attention  to  Single  Market  issues  will  also  support  integration.  The  benefits  of 
structural  reforms  in  a  closely  integrated  market  will  benefit  domestic  consumers  in  the 
country where such reforms are carried out, but they will also spill over to consumers in other 
Member States.  

The financial sector in Europe needs to better support innovation and investments in the 
economy.  Europe  needs  to  continue  developing  its  financial  markets  so  that  all  viable 
companies  can  get  funding  to  invest  in  job  creation  and  growth,  including  the  innovative 
companies of the future. Further measures towards completing the Capital Markets Union will 
ensure that companies have access to the financing they need to grow, innovate and scale up. 
Firms,  and  in  particular  SMEs,  need  to  benefit  fully  from  the  integration  in  cross-border 
value-chains  and  the  seamless  coalescence  of  industry  and  services  that  characterises  the 
digital  age.  The  EU  budget  will  also  contribute  to  this  by  unlocking  private  investment  in 
these sectors.  

Higher  productivity  and  innovation  cannot  be  achieved  without  a  far  reaching 
investment  in  education  and  skills  development.  It  is  vital  to  support  adult  workers,  in 
particular the 60 million low qualified adults, to develop broader skills sets at a higher level. 
Similarly,  reforms  in  initial  education  and  training  are  needed  to  reverse  the  trend  of  an 
increasing share of underperforming pupils – now above 20% in reading, maths and science. 
The  digital  skills  gap  needs  to  be  addressed.  Comprehensive  skills  strategies  should  be 
focused  on  the  individual  needs  for  up-and  re-skilling,  a  shared  responsibility  between 

8 

 
 
 
 
individuals,  businesses  and  governments,  taking  into  consideration  the  needs  of  the  most 
vulnerable. 

Growth and productivity need to be supported by competitive and efficient markets and 
structural  reforms  that  remove  bottlenecks  in  the  business  environment.  Good 
governance,  effective  institutions,  independent  and  efficient  justice  systems,  quality  public 
administrations,  robust  anti-corruption  frameworks,  an  efficient  delivery  of  public 
procurement,  effective  insolvency  frameworks  and  efficient  tax  systems  are  important 
determinants  of  a  Member  State’s  business  environment.  All  these  aspects,  including  those 
related  to  the  rule  of  law,  can  have  an  impact  on  investment  decisions  and  are  therefore 
important to increase productivity and competitiveness. This is all the more so in a globalised 
and  digitalised  environment  with  very  mobile  capital.  Insights  into  the  institutional  and 
administrative  performance  of  the  Member  States,  gathered  from  other  existing  governance 
processes, will feed into the European Semester and inform the macroeconomic assessment.  

5.  Fairness 

To  strengthen  its  economic  and  social  performance,  the  EU  must  fully  deliver  on  the 
principles of the European Pillar of Social Rights. While the economic recovery helped to 
improve  employment  and  social  outcomes  across  Europe,  action  is  needed  to  ensure  the 
enjoyment of social rights and to counter the risks posed by a growing social divide. 

Every worker in Europe deserves fair working conditions. In-work poverty is still above 
the  pre-crisis  levels  in  the  majority  of  EU  countries,  with  almost  1  out  of  10  workers  in 
Europe  at  risk  of  poverty.  While  decreasing,  involuntary  part-time  work  remains  high  in 
several Member States, and the spread of atypical forms of work contributes to labour market 
segmentation. In this perspective, making sure that each worker earns a fair wage, promoting 
transitions  towards  open-ended  full-time  contracts,  as  well  as  investing  in  people  and  their 
skills  are  important  policy  objectives.  A  stronger  involvement  of  social  partners  and  more 
support for building their capacities should be promoted in countries where social dialogue is 
weak. To ensure that workers continue to  receive support also in case of a strong economic 
shock,  a  European  Unemployment  Benefit  Reinsurance  Scheme  -  SURE  could  complement 
the  national  action.  In  addition,  the  EU  should  step  up  the  efforts  to  address  all  forms  of 
irregular employment that contribute to social dumping and exploitation of workers. 

Women  remain  at  a  disadvantage  in  the  labour  market.  Despite  generally  better 
educational  outcomes  for  women,  the  gap  with  men  in  terms  of  employment  rate  and  pay 
have  remained  broadly  stable  in  recent  years.  Closing  these  gaps  would  have  a  positive 
impact on the economy and society. Promoting effective work-life balance policies, ensuring 
access to quality childcare and tackling tax and benefit disincentives to working are crucial to 
increase the employment rates of women and help fight child poverty. 

Promoting  fairness  requires  investment  in  skills,  adequate  and  sustainable  social 
protection systems and fighting against exclusion. Improving the inclusiveness and quality 
of education and training systems is crucial to foster the inclusion of all people in tomorrow’s 
societies.  Early  school  leaving  should  be  reduced  and  the  quality  and  attractiveness  of 
vocational  education  and  training  increased.  Yet,  investment  in  skills  is  far  from  sufficient. 
Social protection systems need to be adapted to protect all those in need, irrespective of their 

9 

 
 
 
 
working status. Europe also has to address more efficiently the inequalities borne by groups at 
risk of exclusion, including persons with a disability, Roma and migrants, to ensure that they 
can  make  full  use  of  their  potential  to  contribute  to  the  economy,  social  protection  systems 
and society. Population ageing makes investing in healthcare and long-term care increasingly 
important, while ensuring the sustainability of the social protection system in order to ensure 
intergenerational fairness.  

Challenges to cohesion across and within Member States have increased. In the aftermath 
of the economic and financial crisis, inequalities in income and access to basic services have 
grown within the Member States. Regional disparities in Europe continue to pose a challenge 
as  they  affect  growth  negatively.  While  the  poorest  regions  have  become  more  prosperous 
since  2010,  their  economic  gap  with  richer  regions  has  widened  including  as  a  result  of  a 
decline  in  investment.  In  some  cases,  technological  change  and  the  energy  transition  could 
increase this gap further, unless suitable measures are taken to boost regional competitiveness.  

The  EU  must  remain  an  engine  of  cohesion.  To  address  regional  and  social  disparities, 
opportunities  need to  be created for those not  directly benefiting from  market  openings  and 
technological change. This includes upgrading skills through better education and training and 
ensuring  appropriate  regional  convergence  on  issues  like  access  to  healthcare  and  quality 
education. Member States need to continue reforming to that end, using the full support of the 
tools in the EU budget. Connectivity of regions and accessibility to mobility are crucial both 
for cohesion and productivity and need to be supported by appropriate investment.  

When designing and implementing  climate and environmental policies not all Member 
States,  regions  and  cities  start  from  the  same  place.  This  is  why  climate  policies  must 
remain framed into a cohesive approach to avoid undermining convergence. While the move 
towards a sustainable economic model can potentially boost growth and employment across 
the EU over the medium  term,  policy measures are required to  mitigate negative impact  on 
specific sectors and regions in the short term. Some sectors will need to transform themselves, 
while  many  other  sectors  will  have  to  take  action  to  preserve  their  competitiveness.  The 
impact  of  these  changes  is  likely  to  be  unequally  felt  across  Europe.  A  new  Just  Transition 
Mechanism  will  provide  tailored  support  to  the  people  and  regions  most  affected  and  to 
ensure  that  nobody  is  left  behind.  It  will  put  particular  emphasis  on  the  reconversion  of 
regions most impacted by the transition out of fossil fuels. 

Tax evasion, tax avoidance and a race to the bottom on taxation undermine the ability of 
countries to set tax policies that meet the needs of their economies and people. National 
tax  and  benefit  systems  should  be  optimised  to  strengthen  incentives  for  labour  market 
participation, to  increase fairness  and transparency  and to  ensure the financial sustainability 
and  adequacy  of  welfare  systems  in  a  changing  world  of  work.  Tax  systems  should  also 
ensure sufficient revenues for public investment, education, healthcare and welfare, guarantee 
fair  burden-sharing  and  avoid  distortion  of  competition  between  firms.  The  fight  against 
aggressive tax planning practices and the fair taxation of globalised companies are essential in 
this respect. EU corporate tax systems are in urgent need of reform. They are not fit for the 
realities  of  the  modern  global  economy  and  do  not  capture  the  new  business  models  in  the 
digital world. Where profits are generated, taxes and levies must also contribute to our social 
security systems, our education and health systems and our infrastructure.  

10 

 
 
 
6.  Macro-economic stability 

The  European  Union  must  further  increase  the  stability  of  its  economy  by  addressing 
the  remaining  fragilities  at  the  national  and  EU  level.  This  is  a  precondition  to  ensure 
resilience  against  future  shocks  and  facilitate  the  transformation.  This  means  responsible 
economic,  fiscal  and  financial  policies  at  the  national  level  in  the  short-term  and  adequate 
policy planning for the longer term. This also means that action needs to be taken at the EU 
level to complete the key reforms to strengthen the euro area.  

Coordination of national fiscal policies, in full respect of the Stability and Growth Pact, 
is  needed  to  support  the  proper  functioning  of  the  Economic  and  Monetary  Union. 
Responsible and responsive fiscal  policies, leading to  sound and sustainable public finances 
are needed to ensure that fiscal policy can fulfil all its functions. The euro area fiscal stance is 
expected to be broadly neutral to slightly expansionary in 2020 and 2021. At the same time, 
national fiscal policies remain insufficiently differentiated in light of the available fiscal space 
in Member States. The pursuit of prudent fiscal policies by Member States with high levels of 
public debt  would put  public debt  on a downward path,  reduce vulnerability to  shocks, and 
allow for the full functioning of automatic stabilisers in the event of an economic downturn. 
On  the  other  hand,  further  boosting  investment  and  other  productive  spending  in  Member 
States with a favourable budgetary situation would support growth in the short and medium 
term, while also helping to rebalance the euro area economy. In case of a worsening outlook, 
an  effective  response  would  call  for  a  supportive  fiscal  stance  at  the  aggregate  level,  while 
pursuing policies in full respect of the Stability and Growth Pact, taking into account country-
specific circumstances and avoiding pro-cyclicality to the extent possible. 

To  ensure  stability,  potential  sources  of  domestic  and  external  imbalances  need  to  be 
addressed,  while  protecting  investments  in  future  sustainability  and productivity.  Both 
domestic  and  external  imbalances  need  to  be  kept  in  check  through  appropriate  monitoring 
and  structural  reforms.  With  the  low  interest  rate  environment,  Member  States  with 
deleveraging  needs  should  make  swift  process  to  reduce  debt  without  jeopardising 
investment. Current high levels of public debt are a source of vulnerability in some Member 
States and a constraint on governments delivering macroeconomic stabilisation when needed. 
Debt  reduction  will  also  be  necessary  to  provide  Member  States  with  fiscal  room  for 
manoeuvre to deal with future challenges and free up funds for investment. This is especially 
true, considering the constrained balance sheets of banks and the indebtedness of the private 
sector.  Further  correcting  large  external  stock  imbalances  and  reducing  corporate  and 
household debt is important to decrease vulnerabilities.  

Improving  the  quality  of  public  finances  is  important  to  boost  potential  growth  and 
support  the  economic  transformation  related  to  climate  and  digital  challenges.  Efforts 
should  take  place  on  the  revenue  side  as  well  as  on  the  expenditure  side  through  regular 
spending  reviews,  prioritising  expenditure  that  fosters  long-term  growth  and  making  use  of 
green  budgeting  tools.  On  the  expenditure  side,  spending  reviews  should  be  carried  out 
regularly  and  expenditure  that  fosters  long-term  growth,  in  particular  for  education, 
employment and investment, should be prioritised. On the revenue side, taxes should support 
the  transition  to  a  green  economy,  become  fairer  and  move  to  sources  less  detrimental  to 
growth.  

11 

 
 
 
The  financial  sector  needs  to  be  strengthened  further  through  the  completion  of  the 
Banking  and  Capital  Markets  Union.  This  should  be  achieved,  inter  alia,  by  setting  up  a 
European  Deposit  Insurance  Scheme,  reducing  non-performing  loans,  addressing  the  bank-
sovereign  nexus,  improving  bank  insolvency  laws  and  by  adopting  measures  to  further 
enhance  financial  integration.  Simultaneously,  rising  unit  labour  costs  or  sharp  increases  in 
housing prices in a number of countries need to be monitored closely, while macro-prudential 
frameworks  need  to  be  adapted  and  appropriate  measures  to  be  taken  where  necessary  to 
prevent the accumulation of new imbalances. Further work on the Capital Markets Union is 
necessary  to  diversify  sources  of  funding  for  companies  and  investment  opportunities  for 
savers,  thereby  increasing  private  risk  sharing  in  the  euro  area.  The  financial  system  also 
needs to be made more resilient to cyber and climate threats. 

Europe  needs  well-targeted  investments  to  support  the  move  to  a  climate-neutral  and 
fully digital economy deployed. The flexibility allowed within the Stability and Growth Pact 
should  be  fully  used  to  enable  the  necessary  investment  while  safeguarding  fiscal 
sustainability. This will help us achieve a more growth-friendly fiscal stance in the euro area 
while  safeguarding  fiscal  responsibility.  A  swift  adoption  of  the  new  multiannual  financial 
framework is also key to ensure the prompt availability of additional investment in support of 
the digital and climate transformation (see Box 2). 

All  the  above  will  be  essential  to  reinforce  the  international  role  of  the  euro,  a  key 
enabler  to  increase  European  clout  on  global  markets.  It  will  help  European  firms, 
consumers and governments to withstand unfavourable external developments and assert the 
role of euro area economy on the world stage The urgency to act has become even stronger in 
the current context, where global rivalries and threats to the multilateral system are giving rise 
to new economic conflicts via trade and currency conflicts, which risk undermining many of 
the benefits of globalization.  

Box  2:  The  contribution  of  the  EU  budget  –  the  need  to  swiftly  adopt  the  new  multiannual 
financial framework  

The European Union budget is at the center of our policy ambitions coming to life.  

Building  on  existing  and  new  mechanisms,  a  Sustainable  Europe  Investment  Plan  will 
deliver  investments  necessary  to  deliver  on  the  European  Green  Deal.  A  Just  Transition 
Mechanism will deal with the most affected regions and ensure no one is left behind. 

The  InvestEU  Programme  is  expected  to  mobilize  over  EUR  650  billion  of  additional 
investment by 2027, through the use of an EU guarantee. It is a key instrument to crowd-in 
private financial resources to promote EU objectives.  

Cohesion  policy funds (European Regional Development  Fund, European Social Fund Plus, 
Cohesion Fund) play a crucial role in supporting social and territorial cohesion in our Member 
States,  regions  and rural  areas, to  keep up with  the digital  and  green transformations of our 
world. The Commission’s proposal for the next multiannual financial framework established 
the overall allocation for cohesion policy for 2021-2027 at EUR 374 billion in current prices.  

12 

 
 
 
 
The  Reform  Support  Programme  will  expand  the  tools  available  at  EU  level  to  help 
implement  structural  reforms  in  all  Member  States,  providing  both  technical  and  financial 
support.  Within  that,  the  Budgetary  Instrument  for  Convergence  and  Competitiveness  is 
expected to provide support for reforms and investment in euro-area Member States. 

The EU budget will invest record amounts in cutting-edge research and innovation, using the 
full flexibility of the next EU budget to focus on the areas with the greatest potential. Horizon 
Europe will provide EUR 98 billion to investments in innovation in the EU. 

The  EU  budget  will  act  as  a  catalyst  to  leverage  sustainable  private  and  public 
investment and channel EU support for the clean energy transition to where it is  most 
needed.  Already  under  the  current  long-term  budget  for  2014-2020,  the  EU  budget  has 
increased the weight of climate and environment in its spending programmes. Climate change 
mitigation and adaptation has been integrated and mainstreamed into all major EU spending 
areas.  In  its  proposal  for  an  EU  budget  of  over  EUR  1  trillion  over  2021-2027(5),  the 
European Commission increased its ambition to spend at least 25% of expenditure on climate-
related  activities;  this  represents  EUR  320  billion.  Under  the  future  common  agricultural 
policy  (CAP),  a  new  green  architecture  will  make  a  stronger  contribution  to  care  for  the 
environment  and  climate,  with  actions  under  the  CAP  expected  to  contribute  40%  of  the 
overall financial envelope of the CAP to climate objectives.  

7.  Refocusing the European Semester  

The new growth strategy with its focus on competitive sustainability will help us achieve 
the  Sustainable  Development  Goals  (SDGs).  The  economic,  social  and  environmental 
challenges are of economy-wide relevance. To succeed we will require considerable efforts in 
all  policy  areas,  at  EU  and  national  level.  A  key  factor  of  success  is  the  ability  of  public 
authorities to drive economic, social and fiscal policies towards the achievement of the SDGs. 
The  contribution  of  the  different  levels  of  governance  within  the  EU  towards  achieving  the 
SDGs  is  complex  due  to  the  division  of  competences  between  Member  States  and  EU 
institutions.  While  the  transformational  challenges  are  commonly  shared,  the  starting  point 
differs:  some  Member  States  more  exposed  to  economic,  social  and  environmental  risks  or 
have  more  progress  to  make  towards  reaching  the  Sustainable  Development  Goals. 
Differentiated,  yet  closely  coordinated,  policies  in  Member  States  are  therefore  necessary. 
Over  the  past  decade,  the  European  Semester  has  established  itself  as  the  key  tool  for  the 
coordination of national economic and employment policies. As such, it can help drive these 
policies  towards  the  achievement  of  the  SDGs  by  monitoring  progress  and  ensuring  closer 
coordination of national efforts in the area of economic and employment policies, keeping its 
focus on issues that have economy-wide implications.  

The  refocusing  of  the  European  Semester  has  already  started  through  the  broader 
economic  narrative  put  forward  in  this  Annual  Sustainable  Growth  Strategy.  It  will 
continue  with  the  2020  country  reports,  the  Commission’s  analysis  of  the  Member  States’ 
social  and  economic  situation.  As  a  first  step,  the  2020  reports  will  feature  a  reinforced 
analysis and monitoring on the SDGs. They will include anew dedicated section focusing on 

5  Commission proposal for a Council Regulation laying down the multiannual financial framework for the years 2021 to 

2027, COM/2018/322 

13 

 
 
 
 
                                                           
environmental  sustainability  will  be  added  to  complement  the  analysis  on  economic  and 
social challenges. The aim is to support Member States’ actions by identifying synergies and 
trade-offs between environmental, social and economic policies at national level. The analysis 
of  the  reports  will  also  support  the  use  of  EU  funds  for  sustainable  investments  in  the 
European Union. In addition to this new section, each country report will also include a new 
annex  setting  out  the  individual  Member  States’  SDG  performance.  This  new  annex  will 
monitor each country’s progress, based on Eurostat’s EU SDG indicator set. In addition, the 
Commission has invited Member States to take stock of progress made on the SDGs in their 
national  reform  programmes,  as  a  qualitative  complement  to  the  indicator-based  monitoring 
by  the  Commission  within  the  Semester  that  will  capture  the  economy-wide  aspects  of  the 
related policies. The objective is not to create additional administrative burden for the national 
administrations but rather to build on existing national monitoring tools, such as for instance 
the  annual  Voluntary  National  Reviews  foreseen  at  the  UN  level,  in  order  to  provide  more 
useful  guidance  and  coordination  at  EU  level.  Building  on  the  country  reports,  the 
Commission’s  proposals  for  the  2020  country-specific  recommendations,  to  be  adopted  in 
May, will highlight  the  contribution  of national  reforms  to  progress  towards specific SDGs, 
where  instrumental  to  ensure  the  coordination  of  economic  and  employment  policies  on 
economic challenges that are a matter of common concern.  

By developing this new approach in this Semester cycle and over the years to come, the 
European Semester will directly support the European Union and its Member States in 
delivering  the  SDGs  across  its  economic  and  employment  policies  and  ensure  that  the 
economy works for everyone and growth is sustainable. 

14 

 
 
 
 
 
 
CONCLUSIONS AND NEXT STEPS 

Putting this sustainable growth strategy to work is a joint endeavour.  It will require the 
combined action and commitment of all European actors. The European Council is invited to 
endorse this strategy. Member States should take account of the priorities the Commission has 
identified  here  in  their  national  policies  and  strategies,  as  set  out  in  their  Stability  or 
Convergence  Programmes  and  their  National  Reform  Programmes.  On  that  basis,  the 
Commission  will  propose  country-specific  recommendations,  which  Member  States  will 
eventually adopt in the Council. Member States are thus ultimately responsible for the content 
and implementation of these recommendations.  

Member States should make full use of the available EU policy and funding instruments. 
The Commission stands ready to support Member States in their reform efforts by providing 
technical  support,  in  particular  through  its  proposed  Reform  Support  Programme,  for  all 
Member  States.  As  part  of  that,  for  euro-area  Member  States,  the  Budgetary  Instrument  for 
Convergence and Competitiveness is expected to provide tailored incentives and support for 
reforms and investment. Finally, cohesion policy funds play a crucial role in supporting social 
and territorial cohesion. 

Economic  governance  and  democratic  accountability  must  go  hand  in  hand.  The 
European Parliament should have a stronger voice on the EU economic governance. To this 
end, the Commission will engage in a dialogue with the European Parliament on how to make 
this  operational  going  forward.  As  a  first  step,  Members  of  the  Commission  in  charge  of 
economic  matters  will  come  to  the  European  Parliament  before  each  key  stage  in  the 
European Semester cycle. This enhanced democratic accountability of the European Semester 
should  help  to  enhance  ownership  and  therefore  reform  implementation.  More  broadly,  the 
Commission will continue the dialogue with Member States, and invites the Member States to 
involve national parliaments, social partners and all other relevant stakeholders.  

15